The Reserve Bank of Australia says there is growing evidence that record-low interest rates are spurring growth outside of mining but has left open the door to further cuts because of the “uncomfortably high" dollar.

In the minutes of the Reserve Bank’s November board meeting, policymakers reiterated that the currency needs to be lower to ensure “balanced growth" in the economy. This commentary reflects the deepening conundrum facing policymakers as they balance the need for a lower currency to help trade-exposed sectors against the risk of overheating the property market after almost two years of rate cuts.

The minutes said the board agreed to keep official rates unchanged at 2.5 per cent, but “not to close off the possibility" of additional interest rate cuts.

Economists interpreted the comments – which triggered a minor rally in the dollar to US93.83¢ from US93.65¢ before the minutes were released – as a minor winding back of the bank’s so-called bias for further rate reductions.

“Even through we don’t think they’re going to act, they’re clearly keeping the dovish bias because of the strength of the currency," said Phil O’Donaghoe, an economist at Deutsche Bank. “And the reason they’re not going to act is they’re seeing improvements in the non-mining domestic economy. House prices, auction clearance rates and dwelling approvals, which will ultimately lead into construction, are all moving up."

The Reserve Bank indicated that the surging housing market is having an ever-rising impact on its interest-rate deliberations. Policymakers said they were watching how its “substantial" monetary policy stimulus was affecting the economy, “including the housing market". “A range of indicators showed that dwelling investment was picking up and this was likely to continue," they said in the minutes. “In time, non-resources business investment was also expected to increase."

About-face unlikely

The remarks come ahead of a heavily anticipated speech by Reserve Bank governor
Glenn Stevens
on Thursday at a function in Sydney to mark the 30th anniversary of the floating of the dollar, raising expectations he will attempt to “talk down" the currency.

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“Having ramped up the tone of the rhetoric on the unco-operative Australian dollar a few weeks back, it would be a surprise if the governor did an about-face," said JPMorgan Australia chief economist Stephen Walters.

“We’d love to hear him utter the words ‘uncomfortably high’ in public."

While labour market conditions “remained soft", the Reserve Bank said “there were recent signs that a number of forward-looking indicators of employment growth were no longer declining".

Bill Evans
, chief economist at Westpac, said there were still question marks about the sustainability of the current upswing in 2014.

“The bank is looking for the wealth, employment [and] confidence boost from the housing upswing to feed into the weak area of the economy," said Mr Evans, who argues the pass-through will be slow and uneven. “The bank will become increasingly aware of the need for lower rates in 2014," he said.